PAUL MCCULLEY: Haters judge the Fed's balance sheet like they would a 'fat man in Speedos'

Paul
McCulley, former chief economist at PIMCO and long-time
confidant of Bill Gross, has a theory on why people hate the
increase in the size of the Federal Reserve's balance sheet: They
think it's just wrong, but they don't have any real reason for
why it's wrong.

In McCulley's view, the Fed avoided a modern-day Great Depression
by acting as forcefully as it did in the wake of the crisis —
dropping interest rates to 0% and buying huge amounts of Treasury
bonds and mortgage-backed securities.

As a result of this second action, called quantitiative easing,
the size of the Fed's balance sheet ballooned.

And this has annoyed a lot of people that participate in and
observe financial markets. Those people think the Fed's
actions would lead to runaway inflation and the
debasement of the dollar. It hasn't happened, but people continue
to believe it could happen.

In a certain way, McCulley thinks this makes complete sense, even
if the fears, in his view, no economic merit.

"Thinking in terms of human nature, some may call it behavioral
economics, I do have a thesis," McCulley told Bloomberg's Barry
Ritholtz. "People looked at the huge expansion in the
Federal Reserve's balance sheet, and they look at that
chart as the moral equivalent of a fat man in Speedos. It's just
wrong! It's just wrong! I can't tell you why it's wrong, but it's
just wrong."

In other words: There's nothing wrong with a fat man in a Speedo.
But, to most people's eyes it doesn't look good. The reason it
doesn't look good is that we have an idealized form of the human
figure and how it should fit in a Speedo.

Similarly, people have an opinion about how the Fed's balance
sheet should look. And when the balance sheet changes in size,
people just can't handle it, even if everything is totally fine.

Here's the offending chart.

FRED

Ultimately, McCulley thinks that the valuable part of this
anti-Fed reaction is in highlighting the outsized role central
banks have played in the world economy since the financial
crisis.

McCulley said that what the world economy needs is more
aggressive fiscal policy in the form of things like government
projects and other initiatives aimed at boosting growth.

McCulley added that central banks have done as much as they
can, but more than probably anybody would like, to stabilize
things in the wake of the crisis.